Get smart about personal finance with the art and science of
negotiation

Negotiating Your Investments is an in-depth guide to
applying the principles of negotiation to your personal finances.
With expert insight into the before, during, and after of a
successful negotiation, you'll learn how to prepare for and conduct
important financial discussions with an eye toward getting the best
possible outcome. The book contains practical, actionable guidance
toward pursuing what you really want, and tools that can greatly
improve your chances of getting it. Clear, concrete advice
describes how to influence the other side, avoid being taken
advantage of, and direct the conversation to your advantage.

As a rule, investors fail to negotiate over financial matters,
to their great detriment. Improving returns, or reducing fees, by a
mere 1 percent per year can make a remarkable difference in your
bottom line. For example, a million dollar investment that returns
7.5 percent rather than 6.5 percent, over 30 years, will put an
extra $2.1 million dollars in your pocket. On the other hand, that
much money could easily go straight into someone else's purse. With
that much money at stake, good negotiating practices become
extremely valuable. Negotiating Your Investments provides
the skills and tools you need to hold your own at the negotiating
table while offering advice you can put to work immediately. Topics
include:

The elements of negotiation – identifying goals,
interests, commitments, alternatives, and power

Preparation, information exchange, bargaining, and closing and
commitment – the four phases of negotiation

Asymmetric information, conflicts of interest, professionalism,
and whom to trust

While the focus is on personal finance, the book also includes
techniques, analysis, and examples drawn from award winning
negotiation courses. It explores the basic theoretical models of
bargaining in depth. With Negotiating Your Investments,
you'll gain the skills and confidence you need to be smarter, and
get better outcomes, in both your financial affairs and the many
other negotiations you conduct every day.

STEVEN G. BLUM is an expert negotiator who works with
corporations, individuals, and nonprofits to refine their
negotiating techniques. He is a principal in the firm of Steven G.
Blum and Associates, LLC, and has conducted seminars in the
Executive Education Programs at the University of Pennsylvania and
Harvard Law School. He has been teaching in the Department of Legal
Studies and Business Ethics at the Wharton School of the University
of Pennsylvania for over twenty years.

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Few of us love buying a car. Well, we love picking out the car, but negotiating for it—not so much. Yet all the dreaded research, haggling, and back and forth with salespeople are needed to get you to a price you can live with on a car you want. Imagine if, instead, you let a “car advisor” who works for the manufacturer make all the decisions for you. You’d be greeted at the car lot by a guy in a pin-striped suit who tells you he’s your car advisor. His job is to analyze your needs and make guesses about the future to select the best car for you.

There might be an arduous process of questionnaires, meetings, and investigations into your automotive history. Finally, after much analysis and input from many experts, you would be handed the keys to a Toyota Camry. There would be no room for haggling; you must pay whatever price they say. And not only do you have to cover the cost of the car, your “car advisor” informs you you’ll be paying for all that analysis, too. This guy is not working in your best interests—he’s trying to sell you a car! Sounds ridiculous, right?

Sure it does, says Steven G. Blum—but it should also sound familiar. That’s because it’s similar to how most people invest. And what we should ask ourselves is why we accept this process…when, really, investing is no different from any other big transaction.

“Though too few people realize it, the care and management of your financial life is best seen as a series of negotiations,” says Blum, who teaches at the Wharton School of Business at the University of Pennsylvania and is the author of the new book, Negotiating Your Investments: Use Proven Negotiation Methods to Enrich Your Financial Life (Wiley, 2014, ISBN: 978-1-118-58307-4, $40.00, www.negotiatingtruth.com). “As an investor you’re seeking a deal in which you will exchange payment for some instrument that you hope will appreciate in value—a stock, a bond, or some sort of commodity. Both sides, you and the sellers, are looking for as much value from the deal as possible.”

Negotiating Your Investments is an in-depth guide to applying proven principles of negotiation to your personal finances. With expert insight into the before, during, and after of a successful negotiation, you’ll learn how to prepare for and conduct important financial discussions with an eye toward getting the best possible outcome.

“Americans waste billions of dollars paying too much to the financial industry,” says Blum. “For many families and individuals, that waste totals well into the millions. Failing to understand these transactions as negotiations sets you up as prey for those who do. Too many people follow investment recommendations with the trust and passivity of lambs being led from the barn.”

Read on for a few tips to help you negotiate your way to better, more profitable investments.

Know what you don’t want, what you do want, and what’s even better. One of the most important things a negotiator can do is figure out what she is trying to gain or achieve. As simple as it sounds, many people don’t truly know their own motivations. Once you remedy this problem, you can be purposeful in keeping the process moving toward your goals and avoiding measures that might throw you off course.

“People invest for many different reasons, and their goals reflect this,” says Blum. “Most of the motivations driving investor behavior can be divided into the following categories: to be safe, to be clever, to be wise, to feel connected to a peer group, as well as to make money. These different kinds of goals can be useful in examining your own desired outcomes. Consider which of these groupings may play a part in your own goals, hopes, and targets.”

Be aware that you’re on an uneven playing field. Knowledge is power, and in the financial industry that is especially true. Most advisors have command of a great many tricks of the trade that are far beyond the knowledge of even very smart regular people. The result is an uneven playing field between the financial industry and the client. Because they know a great deal that you don’t, you are badly disadvantaged and very vulnerable to being manipulated. Among the consequences of this knowledge imbalance are overcharging, underserving, moving bad merchandise, guiding business to friends (or reciprocators), hiding fees, selling things that have no value, misleading, stealing, taking credit unfairly, and claiming random chance as skill.

“So, how do you avoid suffering as a result of this information asymmetry?” asks Blum. “One answer is to learn more, although in all fairness you’ll never be able to level the information playing field with those who work in that field every day. Also, be very careful about whom you hire as your advisor. Look for people whose best interests require that they remain trustworthy.

“Really, there is no single answer,” he adds. “The best advice is not a prescription but a set of cautions and admonitions. Stay vigilant. Don’t trust imprudently. Be keenly aware of the problem of asymmetric information and constantly on guard to avoid being its victim.”

Watch out for conflicts of interest. In the financial services industry, these are varied and complicated. Not only are there money-related conflicts like commissions and fees, sales quotas, and pay-to-play schemes, there are others, like time itself. Financial advisors are under constant pressure to bring in new clients and more revenue. Every hour spent serving you is time away from those other tasks. His haste to move on to snagging new clients and the pressure he’s under to increase revenue could very well affect how he handles your money.

“Such conflicts of interest aren’t easily mitigated,” says Blum. “Fee-only advisors, who are compensated based on agreed-upon rates, may avoid some of the conflict problems that commissions generate. This is a step in the right direction, but it doesn’t eliminate the problem. Consider, for example, what happens when the client asks a fee-only advisor about the wisdom of paying off a mortgage early. He may be loath to recommend a payoff when the funds used to reduce that debt will mean less money available to invest, and in turn, less revenue for him.

Beware of “beat the market” promises. The rational market theory states that markets price assets based on all information known at the time. In essence, the theory states that stock prices accurately reflect all the information that is known about a company at any given moment. This means that future price changes can be the result of only surprises or unexpected events. Since, by definition, surprises and unexpected events cannot be predicted, nobody can successfully know in advance about the future performance of a given stock.

“Taken to its logical extreme, a monkey throwing darts at the stock market page of the newspaper should be able to perform as well as anyone else,” explains Blum. “My Economics 101 professor introduced me to the theory by allowing my classmates and me to choose five stocks any way we wished, including asking anyone we knew, while he threw darts at the Wall Street Journal.He beat most of us.

“The bottom line is that an individual investor will have great difficulty doing better than the overall market by selecting individual stocks or bonds,” he clarifies. “Will some pickers be able to beat the market from time to time? Yes, but their success is primarily just a reflection of random chance. Anyone who tells you they can do it all the time is dishonest or deluded.”

Don’t get distracted by side issues. We are competitive by nature, often driven by the desire to win. But this desire can get you into big trouble when negotiating investments. It can cause you to get distracted by small battles and side issues, taking your focus away from achieving your best outcomes.

“The vision of a good outcome I bring to my own investing is straightforward,” says Blum. “I seek to make the maximum amount of money while avoiding excessive or undue risk. Furthermore, I demand transparency of fees—hidden costs strike me as dishonest trickery. Like most people, I do not wish to pay even a cent for anything that economic science can show is actually worthless. I will not pay anyone to gamble for me. I never want to feel that I am being cheated, lied to, or played for a fool.

“Achieving best outcomes requires avoiding actions that may look inviting but actually lead in other directions. An investor-negotiator should constantly ask herself whether a given move really leads to her ultimate goals,” he adds. “If it doesn’t, just say no.”

Don’t pay for anything that isn’t fair or doesn’t provide value to you, period. Of course,nobody should be expected to work for nothing, and skilled assistance is worth paying for. On the other hand, excessive fees, even those that seem “reasonable,” can be extremely costly over time. That’s why Blum recommends following two rules when it comes to settling on fair compensation for financial advice. One, “Fair terms or no deal.” And two, never accept “we’ve always done it this way” as a reason to agree to pay an advisor a certain amount.

As you negotiate over fees and costs, you will surely encounter the argument that 2 percent of your capital is just a tiny amount to pay for good help. Be careful here, for it is a mistake to examine fees in relation to the amount of your capital. Rather, compare fees to your expected return on the capital. Let’s take a look at the 2 percent deal. One dollar, earning a return of 8 percent over 30 years, will grow to $10.93. Reduced by costs of 2 percent, though, an after-fee return of 6 percent will be achieved. And a dollar growing at 6 percent for 30 years will become $6.02. In this example, a “mere” 2 percent fee reduces the return by almost 45 percent. When we put it that way, does it seem fair?

“And if legitimate investment services with excessive costs are bad, services that add no value to you are a terrible deal at any price,” adds Blum. “As mentioned, most stock-picking strategies perform no better than throwing darts at the Wall Street Journal. This means a great deal of the investment advice and services being offered are worth nothing to you. Financial companies seek payment for the playing out of random chance. Even if such firms spend millions of dollars on salaries, computer programs, and high-priced New York rents, their services are overpriced at a nickel.”

Harness the power of BATNA. In negotiation, power comes from alternatives. One of the first things a skilled negotiator explores is what course she will take if the deal being worked on completely falls apart. If I can’t make this arrangement with this person work out at all, what will I do instead? Answering this question leads you to your Best Alternative To a Negotiated Agreement (BATNA) and lays the foundation for increasing negotiating strength. And greater strength presents the potential for increased control, influence, and authority.

“To find your BATNA, carefully inventory all of the alternatives available to you,” recommends Blum. “Once the very best alternative is identified, it gets labeled as your BATNA. This gives you a powerful floor to support your negotiation effort. You will never accept a deal unless it is better than your BATNA. It forms a minimum acceptable level for you. It is said that a strong BATNA provides the negotiator with both a sword and a shield. In other words, it allows her to be more aggressive (offense) while also protecting her from making bad deals (defense).”

Consider how you might create mutual gain. Remember the grade school lunchroom: your grilled cheese for my turkey sandwich, your cookie for my chips, and both of us happier? Essentially you and your lunch buddy were deciding which options offered the most opportunity for creating mutual gain. You asked yourselves, What can I trade to you that you value more dearly, and what can I receive from you that holds greater worth to me?

“Looking for mutual gain in investing is valuable because it’s a great way to forge lasting relationships,” notes Blum. “For example, you might propose a deal that helps them keep you as a client and get referrals for new clients in exchange for your desire for low fees, full disclosure, and all the attention you need regardless of how long it takes. Tying the fulfillment of their interests to making sure your own get met well is the key to success.

“Be careful to structure agreements so that you get what you need before, or at least simultaneously with, fulfilling the other party’s interests,” he adds. “In short, craft the deal so that the rewards they seek come only after you have received all that was agreed upon. With those concerns in mind, try to work with them to put together the best possible deal for all—a deal that will leave everyone much better off than they started.”

Choose your words (and how you dole them out) wisely. How can you let your advisor know of your requirements, interests, and inviolate standards in the clearest way possible? You need to tell them explicitly that any agreement must be better than your best alternative, meet your interests well, and be demonstrably fair. It will also have to be stated clearly in writing with all its terms verifiable. It cannot in any way “lock you in” but, rather, must give you the right to step away whenever you wish. How can you best communicate all this and more to your partners in a manner that keeps the door open for fair and honest dealing?

“Be warm and friendly in person yet firm and unyielding in writing,” advises Blum. “You will want to follow up all conversations with letters that summarize and confirm what was discussed. Those letters should make clear the firmness with which you are insisting on your needs. Be explicit in your written communications about your expectations, requirements, deal-breakers, and understandings. Choose language carefully, leaving no room for interpretation or discretion by those whose interests may differ from your own.”

Ask lots of questions. A much-cited study found that skilled negotiators spend almost 40 percent of their time acquiring information (asking questions) and clarifying information (restating and reframing what they’ve heard to verify that they’ve understood correctly). Average negotiators spend about 18 percent of their time on the same behaviors. In other words, average negotiators ask half as many questions as skilled negotiators.

“The key is to ask previously prepared questions and, just as important, listen well enough to pose precise follow-up questions,” notes Blum. “Probing and clarifying the other party’s position requires that you listen carefully and formulate good questions on the spot. Strong listening skills, along with good preparation habits and the ability to express thoughts clearly, consistently show up in the research as among the top traits of the most effective negotiators.

“It’s critical to listen and absorb with discernment,” he adds. “The information you receive will not all be accurate. There is usually an incentive for the other parties to misrepresent certain needs or interests. You can preempt bluffing with hard factual questions; it is psychologically much harder to falsify numbers than it is to mislead about the severity of a situation or the importance of an issue. Plus, there is usually a way to check up on factual information.”

Don’t get locked in. Avoid situations or deals that tie you into investments for long periods. Indeed, the shorter the better. For example, you would prefer a contract that permits you to quit without reason with five days’ notice to a contract requiring three months’ notice. A firm billing for services six months in advance locks the client in to a greater degree than does their competitor charging only after the work is completed. An agreement that can be terminated without penalty, whenever the client wishes, is superior to one that imposes an exit fee. That, in turn, is less onerous than one requiring significant notice as well as imposing a price to get out.

“Be especially careful about exit fees,” warns Blum. “They’re really penalties for trying to get your money back. For example, ‘back-loaded’ mutual funds sometimes charge 6 percent to get your money back in the first year, 5 percent in the second year, and so on. The right to your own money without penalty will not be granted until six years after the fund was purchased. Most variable annuity products have a similar ‘early exit’ penalty.

“As an investor-negotiator, you must examine carefully how any proposed commitments will actually work,” he continues. “It is your job to determine what will be advantageous and what might lead to disaster. If the terms of a deal under discussion are to your disadvantage, you should bargain hard to change them. Where change is not possible, or the other side declines to be flexible, you should walk away. Refuse to be bound in ways that work against you or make a good outcome unlikely.”

“To revisit the car buying analogy, just as you wouldn’t accept a ‘car advisor’s’ suggestion and pricing outright, it would be unwise to go to a car dealership before you’ve sufficiently armed yourself with the information you need to negotiate a fair price for the car you want to buy,” says Blum. “I’m urging people to take those same steps before they make investment decisions. Arm yourself with the knowledge and skills you need to make truly fruitful financial decisions. Use negotiation to protect yourself from being taken advantage of by an industry that is counting on your lack of knowledge and preparation. Let’s make sure they are underestimating you.”

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